According to latest figures from HMRC, Stocks and Shares ISAs have a market value of around £430bn. Although this sounds like a lot, there’s more sitting in Cash ISAs. And while I understand the need to have a ‘rainy day’ fund, I believe this money could be earning a better return elsewhere.
For example, the highest interest rate paid by Lloyds Banking Group (LSE:LLOY) on its Cash ISAs is presently (24 July) 1.4%. The best rate offered on its other products is 3.6%.
My approach
Personally, I try and achieve a better return by investing in UK shares. However, I acknowledge there are risks. If things went badly, I could lose all of the money I’ve put into a particular stock.
By contrast, cash deposits of up to £85,000 are protected under the Financial Services Compensation Scheme.
To mitigate, I generally stick to the UK’s largest companies. Generally speaking, these tend to have the strongest balance sheets and, therefore, are less likely to experience financial difficulties.
Good for income
Lloyds‘ shares are presently yielding more than the highest amount paid on any of its savings products. And with net assets of £47.8bn at 31 March, the bank appears to be in good shape.
Over the past 12 months, it’s paid dividends of 3.17p, implying a yield of 4.1%. Looking ahead, analysts are predicting increases to 3.47p (2025), 4.13p (2026) and 4.70p (2027). Although there are no guarantees, if the brokers are right, the stock’s currently yielding up to 6%.
Returning to the present, a 4.1% yield on a £243,902 Stocks and Shares ISA would generate £10,000 of passive income a year. To get there, with a 4.1% annual return, a sum of £4,108 invested every year for 30 years would — with dividends reinvested — be sufficient.
But it’s never a good idea to own just one stock. However, I think investing in equities is – over the long term – likely to generate a better return than holding cash.
Strong and stable
And I believe there are many reasons why Lloyds could meet these dividend forecasts.
It’s currently benefitting from the higher interest rate environment. And even if the Bank of England resumes cutting the base rate, nobody’s predicting that borrowing costs will return to pre-pandemic levels.
There are also signs that the housing market’s starting to recover too and Lloyds has a 20% share of UK mortgages. Also, both its loans and deposits are increasing.
For 2025, its return on tangible equity’s expected to be 13.5%. In 2024, it was 12.3%. Encouragingly, it says it’s “confident” of achieving at least 15% in 2026.
However, I wouldn’t expect much in the way of share price growth. The stock’s performed well lately, which means it’s changing hands for close to the 12-month price target of brokers (82p).
Its price-to-earnings ratio’s also the highest of all the FTSE 100’s banks.
But this shouldn’t bother those who currently have most of their wealth in a Cash ISA. They aren’t expecting their capital to grow either. However, the banking sector’s known for its volatile earnings. And Lloyds is heavily exposed to a UK economy that appears fragile. A weaker-than-expected profit could lead to a cut in its payout.
Despite these risks, on balance, I think the bank’s a good stock for long-term income investors to consider.
